Caution on palm oil prices, despite Malaysian setback

(Agrimoney) – Palm oil futures eased despite a downgrade to expectations for Malaysian production as speakers at a key industry meeting flagged the dent to strong supplies of some alternative vegetable oils, amid some questions over demand.

The Malaysian Palm Oil Board, the industry regulator for Malaysia, the second-ranked palm producing country, cut its forecast for domestic output in calendar 2015 to 20.09m tonnes from 20.5m tonnes, thanks to the impact of floods billed as the worst in 40 years.

“Serious floods in peninsular Malaysia will give a spillover effect in crude palm oil production in 2015,” Ramli Abdullah, MPOB director, told a conference in Kuala Lumpur.

The production forecast would represent a new record, beating the record 19.67m tonnes produced in calendar 2014, according to MPOB data, although at representing the lowest growth rate, of 2.1%, in three years.

The forecast is also below estimates from many other commentators, with the US Department of Agriculture last week, for instance, estimating output in 2014-15, on an October-to-September basis, at 21.25m tonnes.

Palm oil vs soyoil

However, Mr Ramli was cautious over banking on elevated palm oil futures this year, widening to 1,820-2,750 ringgit a tonne, from 2,300-2,500 ringgit a tonne, his forecast for the price range.

At the bottom end of the range, futures would touch levels not seen in Kuala Lumpur since February 2009.

Futures stood at 2,500 ringgit a tonne as late as June last year.

And a downbeat view on prices was also voiced by other speakers at the conference, citing factors ranging from record global output of soybeans, the source of rival vegetable oil soyoil, to the weak crude prices, with palm oil a major feedstock for biodiesel plants.

El Nino factor

Ling Ah Hong, director at Ganling, a Malaysia-based plantations analysis group, said that the El Nino weather pattern expected by many meteorologists looked unlikely to prove strong enough to cause enough disruption to undermine output significantly and support prices.

“A weal El Nino emerging in the first quarter of 2015 is unlikely to prove a major catalyst for supply disruption in 2015,” Mr Ling said, doubting the prospect of a “spike in palm prices” too.

Separately, Mark Welch at Texas A&M University said that “the El Nino weather pattern is expected to moderate over the next few months, just short of a full-fledged event,” defined as consecutive three-month periods with Pacific sea surface temperatures greater than 0.5 degrees Celsius above normal.

El Ninos typically, among their many weather effects, are linked to undue dryness in South East Asia.

‘Pressure on prices’

Nonetheless, Douglas Uggah Embas, the Malaysian plantation industries and commodities minister, flagged the likelihood of a “regular build-up” of palm oil stocks, “particularly towards the last quarter of the year”.

This rise in inventories “will continue to put pressure on palm oil prices,” Mr Uggah said, adding that the lack of tightness in supplies would be “exacerbated” by larger output of the vegetable oil in other countries, and of a rise in production of palm oil too.

Palm oil futures settled down 0.1% at 2,309 ringgit a tonne in Kuala Lumpur, falling back below their 100-day moving average, on a continuous chart.